5 Characteristics of the Best Earnings Plays

During earnings season there are sometimes as many as 50 publicly traded companies reporting earnings on any given day. 

So how do you know which ones to trade? Which ones will make a big move? Which ones will have a strong trend that will follow through and not immediately reverse?

In yesterday’s article, we covered the basics of earnings trading. In today’s article, we will talk about 5 characteristics of the best earnings stocks. These characteristics will mean the stock will have a high probability of making a big move in a short period of time, which us momentum traders need to get paid!

Strong Pre-Market Trend

You should always have pre-market data on when there is an earnings catalyst on a stock. Supply and demand during the pre-market will often be an accurate indicator of how a stock will behave when the market opens. 

Ideally, the stock is in a strong uptrend or downtrend before the market opens. It is much easier to join an existing trend instead of trying to guess which way a stock will go during a period of consolidation.

Low Float

Supply and demand is a critical component of how stocks move. When a stock has a low amount of shares on the public market, it won’t take as many buyers and sellers to move the market.

The most explosive earnings plays will often have less than 100 million shares in their float. Stocks with low floats tend to be the ones that will make 5-10%+ moves right at the open. 

Former Runner

History repeats itself with stocks. If a stock gapped up 3 times before and closed with a strong green candle after an earnings report, chances are it will do it again if it gaps up again. 

Some stocks don’t experience much volatility after earnings reports. Some stocks trade well outside their normal ranges and go on strong trends. These are stocks that you want to be trading. Always check a stock’s daily chart to see how it has behaved in the past after past earnings releases. 

Large Range

The range is one of the most important factors in trading stocks. When trading stocks, always pay attention to the ATR (Average True Range). Knowing where the stock is trading within its range before you enter is crucial for successful trading.

Knowing a stock’s range is essential for knowing when to buy and sell. If a stock like Microsoft is reporting earnings, it is not of much interest to us because it has a big float and small intraday range. There isn’t much meat on this kind of name.

High Relative Volume

The patterns with the best resolution always have high relative volume. Why? Because high volume almost always indicates an imbalance of supply and demand. As a result, the stock will often make a large move, usually trading outside of its normal daily range. 

Examples of Recent Earnings Plays with These Characteristics

$ROKU

$ULTA

$KEYS

Earnings Season Masterclass on Thursday

On Thursday we are hosting a free workshop to show you some of our best strategies and tactics for navigating earnings season. With earnings season next month now is the time to prepare and master strategies to help you capitalize on these opportunities.

Click here to sign up for the free workshop. 

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